CVP analysis
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Green Shades Inc. (GSI) sells hammocks; variable costs are $75 each, and the hammocks are sold for
$125 each. GSI incurs $250,000 of fixed operating expenses annually.
Required
a. Determine the sales volume in units and dollars required to attain a $50,000 profit. Verify your answer
by preparing an income statement using the contribution margin format.
b. GSI is considering implementing a quality improvement program. The program will require a $10
increase in the variable cost per unit. To inform its customers of the quality improvements, the
company plans to spend an additional $20,000 for advertising. Assuming that the improvement
program will increase sales to a level that is 3,000 units above the amount computed in Requirement
a, should GSI proceed with plans to improve product quality? Support your answer by
preparing a budgeted income statement.
c. Determine the new break-even point in units and sales dollars as well as the margin of safety percentage,
assuming that the quality improvement program is implemented.
d. Prepare a break-even graph using the cost and price assumptions outlined in Requirement b.
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